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Economic Development

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For many lay people, economic development - by which we mean the analysis of the economic progress of nations - is what economics as a whole is designed to address. Indeed, what but to find the "nature and causes" of economic development was Adam Smith's purpose? For modern economists, however, the status of economic development is somewhat more uncomfortable: it has always been the maverick field, lurking somewhere in the background but not really considered "real economics" but rather an amalgam of sociology, anthropology, history, politics and, all-too- often, ideology.

Nonetheless, few of the greatest economists actually ignored it outright. As already noted, Adam Smith and indeed, perhaps the entire Classical School was concerned with what might be termed "economic development". Schumpeter's first famous book was entitled a Theory of Economic Development (1911). The German Historical School - and its English and American counterparts - could very well be deemed part of development economics. The entire theory of economic growth can be said to be geared towards it or even underlying it.

Nonetheless, "economic development", as it is now understood, really only started in the 1930s when, prompted by Colin Clark's 1939 quantitative study, economists began realizing that most of humankind did not live in an advanced capitalist economic system. However, the great early concern was still Europe: namely, postwar European reconstruction and the industrialization of its eastern fringes - as exemplified by the pioneering 1943 article of Paul Rosenstein- Rodan and Kurt Mandelbaum's 1947 tome. It was only some time after the war that economists really began turning their concerns towards Asia, Africa and Latin America.

To this end, decolonization was an important catalyst. Faced with a new plethora of nations whose standards of living and institutions were so different from the European, modern development theory, by which we mean the analysis not only of growth but also of the institutions which could induce, sustain and accelerate growth, began in earnest. Early development theorists - such as Bert Hoselitz, Simon Kuznets, W. Arthur Lewis, Hla Myint were among the first economists to begin analyzing economic development as a distinct subject.

The post-war formation of the United Nations - and its attendant agencies, such as the World Bank, the I.M.F., the I.L.O. and the various regional commissions - proved to be another important impetus. The commissioning of numerous studies by these institutions led to the emergence of a non-academic strand of development theory.

Development as Growth and Capital-Formation

Early economic development theory was but merely an extension of conventional economic theory which equated "development" with growth and industrialization. As a result, Latin American, Asian and African countries were seen mostly as "underdeveloped" countries, i.e. "primitive" versions of European nations that could, with time, "develop" the institutions and standards of living of Europe and North America.

As a result, "stage theory" mentality of economic development dominated discussions of economic development. As later made famous by Alexander Gerschenkron (1953, 1962) and, more crudely, Walt W. Rostow (1960), the stages theories argued that all countries passed through the same historical stages of economic development and that current underdeveloped countries were merely at an earlier stage in this linear historical progress while First World (European and North American) nations were at a later stage. "Linear stages" theories had been developed earlier by German Historicists, thus it ought not be surprising to find historians, such as Gerschenkron and Rostow, among its main adherents.

More enlightened attempts to arrive at an empirical definition of the concept of "underdevelopment", as exemplified by the work of Hollis Chenery, Simon Kuznets and Irma Adelman, led to the general conclusion that while there were not explicit "linear stages", countries tended nonetheless to exhibit similar patterns of development, although some differences could and did persist. The task of the development economist, in this light, was to suggest "short-cuts" by which underdeveloped countries might "catch up" with the developed and leap over a few stages.

By equating development with output growth, early development theorists, prompted by Ragnar Nurkse (1952), identified capital formation as the crucial component to accelerate development. The celebrated early work on the "dual economy" by Sir W. Arthur Lewis (1954, 1955) precisely stressed the role of savings in development. Early Keynesians, such as Kaldor and Robinson, attempted to call attention to the issue of income distribution as a determinant of savings and growth. Even modern Marxians such as Maurice Dobb (1951, 1960) focused on the issue of savings-formation.

Of course, savings could themselves be manipulated by government intervention - as Lewis had intimated and the Keynesians insisted. Indeed, earlier, Rosenstein-Rodan (1943) had argued that increasing returns to scale made government-directed industrialization feasible. The notion of turning "vicious circles" of low savings and low growth into "virtuous circles" of high savings and high growth by government intervention was reiterated by Hans W. Singer in his doctrine of "balanced growth" and Gunnar Myrdal in his theory of "cumulative causation". Thus, government involvement - whether by planning, socio-economic engineering or effective demand management - was regarded as a critical tool of economic development.

Other economists turned to international trade as the great catalyst to growth. Already Hla Myint, Gottfried Haberler and Jacob Viner had stressed this avenue - arguing along lines similar to the classical doctrine of Adam Smith that trade and specialization can increase the "extent of the market". However, earlier in the 1930s, D.H. Robertson had expressed his doubts on this account - and these were later reiterated by Ragnar Nurkse, H.W. Singer and Rául Prebisch.

Social Aspects of Economic Development

Although capital-formation never really left the field, the meaning of the term mutated somewhat over time. T.W. Schultz, drawing upon his famous Chicago School thesis, turned away from physical capital accumulation to emphasize the need for "human capital" formation. This led to an emphasis on education and training as pre-requisites of growth and the identification of the problem of the "brain drain" from the Third World to the First (and, as would later be stressed, from the private sector to government bureaucracies). W. Arthur Lewis and Hans W. Singer extended Schultz's thesis by arguing that social development as a whole - notably education, health, fertility, etc. - by improving human capital, were also necessary pre-requisites for growth. In this view, industrialization, if it came at the cost of social development, could never be self-sustaining.

However, it was really only in 1969 that Dudley Seers finally broke the growth fetishism of development theory. Development, he argued, was a social phenomenon that involved more than increasing per capita output. Development meant, in Seers's opinion, eliminating poverty, unemployment and inequality as well. Singer, Myrdal and Adelman were among the first old hands to acknowledge the validity of Seers's complaint and many younger economists, such as Mahbub ul Haq, were galvanized by Seers's call to redefine economic development. Thus, structural issues such as dualism, population growth, inequality, urbanization, agricultural transformation, education, health, unemployment,etc. all began to be reviewed on their own merits, and not merely as appendages to an underlying growth thesis.

Particularly worthy of note was the resurrection of the work of Chayanov on the unique structures of peasant economies. Also emergent, in this period, was a debate on the very desirability of growth. E.F. Schumacher, in a famously provocative popular book, Small is Beautiful (1973), argued against the desirability of industrialization and extolled the merits of handicrafts economies. As the world environmental crisis became clearer in the 1980s, this debate took a new twist as the very sustainability of economic development was questioned. It became clear that the very desirability of development needed to be reconsidered.

Structuralism and its Discontents

Before Seers's complaint, many economists had already felt extraordinarily uncomfortable with early development theory and the implicit assumptions behind "stages" reasoning. A new (or old - depending on one's vantage point) idea began to germinate - what may be loosely termed "structuralism". The "structuralist" thesis, succinctly, called attention to the distinct structural problems of Third World countries: underdeveloped countries, they argued, were not merely "primitive versions" of developed countries, rather they had distinctive features of their own. As mentioned, Chenery had argued a similar thesis, but nonetheless focused on the similarities of experience. The newer structuralists, in contrast, sought to bring attention to the differences. Albert O. Hirschmann (1958) was one of the early few who stressed the need for country-specific analysis of development - as was stressed later by Dudley Seers.

One of these distinctive features was that, unlike European industrialization, Third World industrialization was supposed to occur while these countries existed alongside already- industrialized Western countries and were tied to them by trade. This, speculated a few, could give rise to distinct structural problems for development.

Coincidental with H.W. Singer, the UNCLA economist, Raúl Prebisch, formulated the famous "dependency" theory of economic development, wherein he argued that the world had developed into a "center-periphery" relationship among nations, where the Third World was regressing into becoming the producer of raw materials for First World manufacturers and were thus condemned to a peripheral and dependent role in the world economy. Thus, Prebisch concluded, some degree of protectionism in trade was necessary if these countries were to enter a self-sustaining development path. Import-substitution, enabled by protection and government policy, rather than trade and export-orientation, was the preferred strategy. Historical examples of government-directed industrialization, such as Meiji Japan and Soviet Russia, were held up as proof that there was not only one path to development, as had been implied by the cruder "stages" theories.

The Prebisch-Singer thesis resounded with particularly with Marxian thinkers - who identified elements of Rosa Luxemburg's and V.I. Lenin's arguments on imperialism in it. Breaking with savings-obsessed orthodox Marxian thinkers such as Dobb, Neo-Marxians such as Paul Baran, Paul Sweezy, A.G. Frank and Samir Amin took the Prebisch-Singer thesis, merged it the Luxemburg thesis, and drew it into the modern era.  Many Third World governments adopted the language and policies of the structuralists and/or the Neo-Marxians in the 1960s and 1970s, and indeed, the movement seemed to have been eminently influential. "Neo-Colonialism", "core-periphery" and "dependency" were the catch-words of the day. 

However, as time moved on, these policies seemed to fail to yield their promised fruit, and a Neoclassical (or, more accurately, Neo-Liberal) countermovement initiated by the lone voices of P.T. Bauer, I.M.D. Little, Deepak Lal, Bela Balassa, Anne Krueger and Harry G. Johnson began to gain more adherents. Their thesis was simple: government intervention did not only not improve development, it in fact thwarted it. The emergence of huge bureaucracies and state regulations, they argued, suffocated private investment and distorted prices making developing economies extraordinarily inefficient. In their view, the ills of unbalanced growth, dependency, etc. were all ascribed to too much government dirigisme, not too little.

In recent years, the Neoclassical thesis has gained greater adherence, particularly in Latin America. However, the evidence is still ambivalent and disputed. Both structuralists and counter-structuralists point to fast East Asian development and disastrous African experience as proofs of their directly opposing theses.



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Resources on Economic Development


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